Third, despite massive stimulus, we think that global inflation in the developed markets remains low in 2013.

Given that central banks around the world continue to deploy unprecedented amounts of liquidity, we believe it is important to “fact check” our thesis that inflation will remain low in the near term. So, what are we thinking? Our view is that a synchronous increase in global inflation can only occur after bank deleveraging in Europe has been completed (Exhibit 17). Indeed, while U.S. banks and brokers have largely completed their deleveraging cycle, the reconfiguring of balance sheets has not fully run its course in Europe (Exhibit 16). Besides banks having no desire to mark down impaired credit because of the associated hit to equity, one of the major issues has been that recently announced ECB programs have encouraged the banks to actually add to, not subtract from their government bond holdings.